Published Monday 22 June 2026

Table of contents

• What is gross profit?
• Gross profit formula
• How to calculate gross profit
• What is cost of goods sold (COGS)?
• Gross profit vs gross profit margin
• Gross profit vs net profit
• What is a good gross profit margin?
• How to improve your gross profit
• Track your gross profit with Xero
• FAQs on gross profit

Key takeaways

• Gross profit is the money left after subtracting the cost of goods sold (COGS) from your total revenue. It shows how efficiently your business turns sales into profit before accounting for overhead costs.
• The gross profit formula is simple: Revenue − Cost of Goods Sold = Gross Profit. You can use it alongside gross profit margin to compare performance across periods or industries.
• Knowing your gross profit helps you set better prices, control production costs, and identify which products or services are most profitable.
• Tracking gross profit regularly, whether monthly or quarterly, gives you a clearer picture of your business's financial health and helps you spot trends early.

What is gross profit?

If you're running a small business, understanding how to calculate gross profit is one of the most practical financial skills you can have. It tells you whether you're making enough on each sale to cover the direct costs of delivering your product or service.

Gross profit is the amount of money your business earns from sales after subtracting the direct costs of producing or delivering those goods and services. These direct costs are known as cost of goods sold (COGS).

Unlike net profit, gross profit doesn't account for overhead expenses like rent, marketing, or admin costs. It focuses purely on the relationship between your revenue and the costs directly tied to what you sell.

For small business owners, gross profit is a useful indicator of how efficiently you're producing or sourcing your products. A healthy gross profit means you've got room to cover your operating costs and still turn a profit at the end of the day.

Gross profit formula

The gross profit formula is straightforward and only requires 2 figures from your profit and loss statement.

Gross Profit = Revenue − Cost of Goods Sold (COGS)

Revenue is the total income your business earns from selling goods or services before any costs are deducted. It's sometimes called sales revenue or turnover. COGS includes the direct costs of producing or purchasing the items you sell, such as raw materials, direct labour, and manufacturing costs.

For example, if your business earns $200,000 in revenue and your COGS is $120,000, your gross profit is $80,000.

How to calculate gross profit

Calculating gross profit takes just a few steps. Here's how to calculate gross profit for your business using a practical example.

1. Add up your total revenue

Start by calculating your total revenue for the period you're analysing, whether that's a month, quarter, or financial year. Revenue includes all income from sales of goods or services before any deductions.

For example, say you run a small furniture business in Australia. Over the last quarter, you sold $150,000 worth of furniture. That's your total revenue.

2. Calculate your cost of goods sold (COGS)

Next, add up all the direct costs involved in producing or purchasing the goods you sold during that same period. This includes raw materials, direct labour costs, and any manufacturing or production overheads.

In this example, your COGS might include $60,000 in timber and materials, $25,000 in workshop labour, and $5,000 in finishing supplies. Your total COGS is $90,000.

3. Subtract COGS from revenue

Apply the gross profit formula by subtracting your COGS from your total revenue.

$150,000 (revenue) − $90,000 (COGS) = $60,000 (gross profit)

Your gross profit for the quarter is $60,000. This is the amount available to cover your operating expenses like rent, utilities, marketing, and salaries before you arrive at your net profit.

What is cost of goods sold (COGS)?

To calculate gross profit accurately, you need a solid understanding of cost of goods sold. COGS represents all the direct costs your business incurs to produce or purchase the goods and services it sells.

Common costs that fall under COGS include:

• Raw materials and components
• Direct labour costs (wages for staff directly involved in production)
• Manufacturing and production overheads
• Packaging and shipping costs for delivered goods
• Purchase costs of goods bought for resale

COGS doesn't include indirect costs that aren't tied to production. These are your operating expenses and are accounted for separately when calculating net profit.

Costs typically excluded from COGS include:

• Rent and utilities for office space
• Marketing and advertising
• Administrative salaries
• Insurance and legal fees
• Interest and tax payments

Keeping accurate records of your COGS is essential. If you underestimate your direct costs, your gross profit will look higher than it actually is, which can lead to poor pricing and budgeting decisions. Your profit and loss statement is the best place to find these figures.

Gross profit vs gross profit margin

Gross profit and gross profit margin are closely related, but they measure different things. Understanding the distinction helps you compare performance more effectively.

Gross profit is a dollar amount. It tells you how much money is left after subtracting COGS from revenue. Gross profit margin, on the other hand, is a percentage that shows what proportion of your revenue is retained as gross profit.

Gross Profit Margin = (Gross Profit ÷ Revenue) × 100

Using the furniture business example above: $60,000 (gross profit) ÷ $150,000 (revenue) × 100 = 40% gross profit margin.

Gross profit margin is particularly useful when comparing your business's performance over different periods or against industry benchmarks. A business earning $1 million in revenue with a 20% margin is keeping less of each dollar than one earning $200,000 with a 40% margin.

Gross profit vs net profit

While gross profit focuses on your direct production costs, net profit gives you the full picture of your business's profitability. Both are important, but they serve different purposes.

Gross profit only subtracts COGS from revenue. Net profit goes further by also subtracting all your operating expenses, interest, and taxes. It's the amount you're left with after every business cost has been accounted for.

Here's how both calculations work from the same revenue figure:

• Revenue: $150,000
• COGS: $90,000
• Gross profit: $60,000
• Operating expenses (rent, marketing, admin, utilities): $35,000
• Interest and tax: $5,000
• Net profit: $20,000

Gross profit shows whether your pricing and production costs are sustainable. Net profit shows whether your overall business model is profitable once all costs are considered. You can have a strong gross profit but a weak net profit if your overhead costs are too high.

What is a good gross profit margin?

There's no single answer to what counts as a "good" gross profit margin, because it varies significantly by industry and business model. What matters most is how your margin compares to businesses similar to yours.

As a general guide, here are typical gross profit margin ranges across common industries:

• Retail: 20–50%, depending on the type of goods sold
• Professional services: 50–70%, since COGS is often limited to labour
• Manufacturing: 25–35%, due to higher material and production costs
• Food and hospitality: 30–40%, with significant variation by venue type
• Construction: 15–25%, depending on project scope and materials

If your gross profit margin is consistently below your industry average, it could signal that your pricing is too low, your production costs are too high, or you're discounting too heavily. Tracking your margin over time helps you spot these patterns early.

The Australian Taxation Office (ATO) publishes industry benchmarks that can help you understand where your business sits relative to others in your sector.

How to improve your gross profit

Once you know how to calculate gross profit, the next step is finding ways to improve it. Even small changes to your pricing or cost structure can have a meaningful impact on your bottom line.

Here are practical strategies to boost your gross profit:

• Review your pricing: make sure your prices reflect your current costs, not what they were when you first set them. Regular price reviews help you stay profitable as supplier costs change.
• Negotiate with suppliers: look for better rates on raw materials or bulk purchasing discounts. Even a small reduction in material costs can improve your margin across hundreds of sales.
• Reduce waste and inefficiency: streamline your production process to minimise wasted materials, time, and labour. Track where waste occurs and address it systematically.
• Focus on high-margin products or services: analyse which items in your range deliver the best gross profit margin and prioritise selling more of them.
• Improve inventory management: overstocking ties up cash and can lead to markdowns. Use inventory management tools to keep stock levels aligned with demand.

Improving gross profit isn't always about charging more. Often, it's about working smarter with the resources you already have and making data-driven decisions about where to focus your efforts. For a broader look at tracking business performance, see how to measure profitability.

Track your gross profit with Xero

Calculating gross profit by hand is doable, but keeping track of it consistently across months and quarters is much easier with the right tools. Xero's accounting software automatically pulls your revenue and cost data together so you can see your gross profit at a glance.

With Xero, you can generate profit and loss reports that break down your revenue, COGS, and gross profit for any period. You can also track trends over time, compare performance across months, and spot changes in your margins before they become a problem.

If you're ready to take the guesswork out of tracking your gross profit and make more confident financial decisions, get one month free.

FAQs on gross profit

Here are answers to frequently asked questions about gross profit.

What does gross profit measure?

Gross profit measures how much money your business retains from sales after covering the direct costs of producing or delivering your goods and services. It's an indicator of production efficiency and pricing effectiveness.

What is the difference between gross profit and net profit?

Gross profit subtracts only the cost of goods sold from revenue, while net profit subtracts all business expenses including operating costs, interest, and taxes. Net profit gives you a more complete picture of overall profitability.

Can you have a high gross profit margin and still lose money?

Yes, it's possible. If your operating expenses, such as rent, salaries, and marketing, exceed your gross profit, you'll record a net loss even with strong gross margins.

How often should you calculate gross profit?

It's a good idea to calculate gross profit at least monthly, especially if you're managing inventory or your costs fluctuate. Regular tracking helps you catch margin changes early and adjust your pricing or spending accordingly.